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Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-04 · 203 added, 190 removed, 260 unchanged (60% of the section changed)

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The following discussion and analysis presents factors that had a material effect on the results of operations of SkyWest, Inc.

(“SkyWest” “we” or “us”) during the three- and six-month periods ended June 30, 2022 and 2021.

Also discussed is our financial condition as of June 30, 2022, and December 31, 2021.

You should read this discussion in conjunction with our condensed consolidated financial statements for the three and six months ended June 30, 2022, including the notes thereto, appearing elsewhere in this Report.

(“SkyWest” “we” or “us”) during the three- and nine-month periods ended September 30, 2022 and 2021.

Also discussed is our financial condition as of September 30, 2022, and December 31, 2021.

You should read this discussion in conjunction with our condensed consolidated financial statements for the three and nine months ended September 30, 2022, including the notes thereto, appearing elsewhere in this Report.

This discussion and analysis contains forward-looking statements.

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These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,” and “continue” and similar terms used in connection with statements regarding our outlook, anticipated operations, the revenue environment, our contractual relationships, and our anticipated financial performance.

These statements include, but are not limited to, statements regarding the impact of the COVID-19 pandemic on our business, results of operations and financial condition and the impact of any measures, including travel restrictions, taken to mitigate the effect of the pandemic, our future growth and development plans, including our future financial and operating results, our plans, objectives, expectations and intentions and other statements that are not historical facts.

These statements include, but are not limited to, statements regarding the impact of the COVID-19 pandemic on our

business, results of operations and financial condition and the impact of any measures, including travel restrictions, taken to mitigate the effect of the pandemic, our future growth and development plans, including our future financial and operating results, our plans, objectives, expectations and intentions and other statements that are not historical facts.

Readers should keep in mind that all forward-looking statements are based on our existing beliefs about present and future events outside of our control and on assumptions that may prove to be incorrect.

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residual aircraft values and related impairment charges;

the impact of global instability, including the ongoing military conflict between Russia and the Ukraine;

labor relations and costs;

the ability to attract and retain qualified pilots;

potential fluctuations in fuel costs and potential fuel shortages;

the impact of global instability, including the ongoing military conflict between Russia and the Ukraine;

the impact of weather-related or other natural disasters on air travel and airline costs;

new aircraft deliveries;

and the ability to attract and retain qualified pilots, as well as the other factors identified under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, under the heading “Risk Factors” in Part II, Item 1A of this Report, elsewhere in this Report, in our other filings with the Securities and Exchange Commission (the “SEC”) and other unanticipated factors.

and new aircraft deliveries, as well as the other factors identified under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, under the heading “Risk Factors” in Part II, Item 1A of this Report, elsewhere in this Report, in our other filings with the Securities and Exchange Commission (the “SEC”) and other unanticipated factors.

There may be other factors that may affect matters discussed in forward-looking statements set forth in this Report, which factors may also cause actual results to differ materially from those discussed.

Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports that we have filed with the SEC may

be further amplified by the global impact of the COVID-19 pandemic.

Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports that we have filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic.

We assume no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by applicable law.

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(“SkyWest Airlines”).

As of June 30, 2022, we offered scheduled passenger service with approximately 2,200 total daily departures to destinations in the United States, Canada, and Mexico.

Our fleet of Embraer E175 regional jet aircraft (“E175”), Canadair CRJ900 regional jet aircraft (“CRJ900”) and Canadair CRJ700 regional jet aircraft (“CRJ700”) have a multiple-class seat configuration, whereas our CRJ200 aircraft have a single-class seat configuration.

As of June 30, 2022, we had 638 total aircraft in our fleet, including 521 aircraft in scheduled service or under contract under our code-share agreements, summarized as follows:

As of September 30, 2022, we offered scheduled passenger service with approximately 2,100 total daily departures to destinations in the United States, Canada, and Mexico.

Our fleet of Embraer E175 regional jet aircraft (“E175”), Canadair CRJ900 regional jet aircraft (“CRJ900”) and Canadair CRJ700 regional jet aircraft (“CRJ700”) have a multiple-class seat configuration, whereas our Canadair CRJ200 regional jet aircraft (“CRJ200”) aircraft have a single-class seat configuration.

As of September 30, 2022, we had 642 total aircraft in our fleet, including 530 aircraft in scheduled service or under contract under our code-share agreements, summarized as follows:

Aircraft in scheduled service or under contract

Leased to third parties

* As of June 30, 2022, other aircraft included:

supplemental spare aircraft supporting our code-share agreements that may be used in future code-share or leasing arrangements, aircraft transitioning between code-share agreements with our major airline partners, aircraft held-for-sale, or aircraft that are scheduled to be disassembled for use as spare parts.

* As of September 30, 2022, other aircraft included:

supplemental spare aircraft supporting our code-share agreements

that may be used in future code-share or leasing arrangements, aircraft transitioning between code-share agreements with our major airline partners, aircraft held-for-sale, or aircraft that are scheduled to be disassembled for use as spare parts.

Our business model is based on providing scheduled regional airline service under code-share agreements (commercial agreements, typically in the form of capacity purchase agreements or prorate agreements, between airlines that, among other things, allow one airline to use another airline’s flight designator codes on its flights) with our major airline partners.

Our success is principally dependent on our ability to meet the needs of our major airline partners by providing a reliable and safe operation at attractive economics.

From June 30, 2021, to June 30, 2022, we made several changes to our fleet count under our flying agreements, primarily consisting of the addition of 30 new E175 aircraft and 10 used CRJ700 aircraft.

We anticipate our fleet will continue to evolve, as we are scheduled to add two new E175 aircraft with American in the third quarter of 2022, 14 new E175 aircraft with Delta by the end of 2022, and one new E175 aircraft with Alaska by the first half of 2023.

From September 30, 2021, to September 30, 2022, we made several changes to our fleet count under our flying agreements, primarily consisting of the addition of 33 new E175 aircraft and 8 used CRJ700 aircraft.

We anticipate our fleet will continue to evolve, as we are scheduled to add seven new E175 aircraft with Delta by the end of 2024 and one new E175 aircraft with Alaska by the end of 2025.

We also anticipate adding 11 used CRJ700 aircraft with American by the end of 2023.

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Our primary objective in the fleet changes is to improve our profitability by adding new E175 aircraft and used CRJ aircraft to capacity purchase agreements, and potentially removing older aircraft from service that typically require higher maintenance costs.

As of June 30, 2022, approximately 42.2% of our aircraft in scheduled service or under contract were operated for United, approximately 29.0% were operated for Delta, approximately 20.7% were operated for American and approximately 8.1% were operated for Alaska.

As of September 30, 2022, approximately 41.5% of our aircraft in scheduled service or under contract were operated for United, approximately 29.8% were operated for Delta, approximately 20.8% were operated for American and approximately 7.9% were operated for Alaska.

Historically, multiple contractual relationships with major airlines have enabled us to reduce our reliance on any single major airline code and to enhance and stabilize operating results through a mix of fixed-fee arrangements (referred to as “capacity purchase agreements”) and revenue-sharing arrangements (referred to as “prorate” agreements).

For the six months ended June 30, 2022, capacity purchase revenue and prorate revenue represented approximately 88.3% and 11.7%, respectively, of our total flying agreements revenue.

On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours (measured from takeoff to landing, including taxi time), flight departures, the

number of aircraft under contract and other operating measures.

For the nine months ended September 30, 2022, capacity purchase revenue and prorate revenue represented approximately 88.0% and 12.0%, respectively, of our total flying agreements revenue.

On capacity purchase routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours (measured from takeoff to landing, including taxi time), flight departures, the number of aircraft under contract and other operating measures.

On prorate routes, we have more control over scheduling, pricing and seat inventories, and we share passenger fares with our major airline partners according to prorate formulas.

Our prorate revenue and profitability may fluctuate based on ticket prices and passenger loads, and we are responsible for the operating costs of the prorate flights, including fuel and airport costs.

Second Quarter Summary

We had total operating revenues of $799.1 million for the three months ended June 30, 2022, a 21.6% increase compared to total operating revenues of $657.0 million for the three months ended June 30, 2021.

We had net income of $54.0 million, or $1.07 per diluted share, for the three months ended June 30, 2022, compared to net income of $62.0 million, or $1.22 per diluted share, for the three months ended June 30, 2021.

The significant items affecting our revenue and operating expenses during the three months ended June 30, 2022, are outlined below:

The number of aircraft we have in scheduled service and the number of block hours we incur on our flights are primary drivers of our flying agreements revenue under our capacity purchase agreements.

Third Quarter Summary

We had total operating revenues of $789.4 million for the three months ended September 30, 2022, a 6.0% increase compared to total operating revenues of $744.8 million for the three months ended September 30, 2021.

We had net income of $48.4 million, or $0.96 per diluted share, for the three months ended September 30, 2022, compared to net income of $9.7 million, or $0.19 per diluted share, for the three months ended September 30, 2021.

The significant items affecting our revenue and operating expenses during the three months ended September 30, 2022, are outlined below:

The number of aircraft we have in scheduled service or under contract under our code-share agreements and the number of block hours we incur on our flights are primary drivers of our flying agreements revenue under our capacity purchase agreements.

The number of flights we operate and the corresponding number of passengers we carry are the primary drivers of our revenue under our prorate flying agreements.

As a result of higher passenger demand, the number of aircraft we operated increased from 478 as of June 30, 2021 to 521 as of June 30, 2022;

the number of block hours increased from 324,045 for the three months ended June 30, 2021 to 334,753 for the three months ended June 30, 2022, or by 3.3%;

and the number of passengers we carried increased from 9.3 million for the three months ended June 30, 2021 to 11.1 million for the three months ended June 30, 2022, or by 19.6%.

As a result of additional aircraft operating under our capacity purchase agreements for the three months ended June 30, 2022, as compared to three months ended June 30, 2021, our capacity purchase revenue increased $149.3 million, or 28.2%.

Additionally, we provided temporary rate reductions to our major airline partners under our capacity purchase agreements during the three months ended June 30, 2021, in response to the COVID-19 demand reduction experienced by our major airline partners in 2021.

We did not provide our major airline partners temporary rate reductions during the three months ended June 30, 2022.

As a result of fewer aircraft operating under our prorate agreements and fewer passengers carried on our prorate routes, our prorate revenue decreased $8.5 million, or 8.2%, for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021.

The number of aircraft we have in scheduled service or under contract under code-share agreements increased from 486 as of September 30, 2021 to 530 as of September 30, 2022;

and the number of block hours decreased from 370,462 for the three months ended September 30, 2021 to 323,742 for the three months ended September 30, 2022, or by 12.6%, due to a reduction in scheduled daily utilization of our aircraft primarily caused by pilot availability constraints.

Our capacity purchase revenue increased $78.0 million, or 13.2%, from the three months ended September 30, 2021 to the three months ended September 30, 2022, primarily as a result of temporary rate reductions we provided to

our major airline partners under our capacity purchase agreements during the three months ended September 30, 2021, in response to the COVID-19 demand reduction experienced by our major airline partners in 2021.

We did not provide our major airline partners temporary rate reductions during the three months ended September 30, 2022.

Additionally, our capacity purchase agreement revenue increased during the three months ended September 30, 2022, due to more aircraft under contract, partially offset by a reduction in completed block hours compared to the three months ended September 30, 2021.

As a result of fewer departures under our prorate agreements and fewer passengers carried on our prorate routes, our prorate revenue decreased $33.6 million, or 26.2%, for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.

Operating Expenses

Our total operating expenses increased $168.5 million, or 31.1%, for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

The increase in operating expenses was primarily due to $114.1 million in payroll support program grants received from U.S.

Treasury reflected as an offset to operating expenses for the three months ended June 30, 2021 and an increase in the number of flights we operated for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021.

Departures increased from 185,498 for the three months ended June 30, 2021 to 199,678 for the three months ended June 30, 2022, or by 7.6%.

Our total operating expenses increased $16.1 million, or 2.3%, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

The increase in operating expenses was primarily due to an increase in salaries, wages, and benefits, offset by a decrease in maintenance expense for the three months ended September 30, 2022, as a result of the timing of heavy maintenance events for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.

Our operating expenses for the three months ended September 30, 2021 also included a $115.4 million grant benefit from the payroll support program reflected as a reduction to our operating expenses, partially offset by an $84.6 million, non-cash impairment charge.

We did not have a similar payroll grant benefit or impairment during the three months ended September 30, 2022.

Departures decreased from 210,251 for the three months ended September 30, 2021 to 194,683 for the three months ended September 30, 2022, or by 7.4%.

Additional details regarding the increase in our operating expenses are described in the section of this Report entitled “Results of Operations.”

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Aircraft in Service or Under Contract

June 30, 2022

September 30, 2022

December 31, 2021

June 30, 2021

September 30, 2021

Critical Accounting Policies and Estimates

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The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates.

There have been no significant changes in our critical accounting estimates during the six months ended June 30, 2022.

There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2022.

Results of Operations

Three Months Ended June 30, 2022 and 2021

Three Months Ended September 30, 2022 and 2021

Operational Statistics

The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below.

The increase in block hours, departures and passengers carried during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, was primarily due to additional E175 aircraft operating under our capacity purchase agreements and the continued demand recovery from reduced flight schedules in 2021 resulting from the COVID-19 pandemic.

For the three months ended June 30,

The decrease in block hours, departures and passengers carried during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was primarily due to labor constraints,

including the number of available captains, offset by additional E175 aircraft operating under our capacity purchase agreements.

For the three months ended September 30,

Block hours by aircraft type:

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The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands):

For the three months ended June 30,

For the three months ended September 30,

Flying agreements

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We disaggregate our flying agreements revenue into the following categories (dollar amounts in thousands):

For the three months ended June 30,

For the three months ended September 30,

Capacity purchase agreements revenue:

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The increase in “Capacity purchase agreements revenue:

flight operations” of $114.3 million was primarily due to an increase in the number of aircraft we operated under our capacity purchase agreements with our major airline partners during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

From June 30, 2021, to June 30, 2022, we added 53 aircraft under capacity purchase agreements.

Our completed departures increased 7.6% and completed block hours increased 3.3% during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

We did not provide our major airline partners temporary rate reductions during the three months ended June 30, 2022.

flight operations” of $68.3 million was primarily due to temporary rate reductions we provided to our major airline partners under our capacity purchase agreements during the three months ended September 30, 2021, in response to the COVID-19 demand reduction experienced by our major airline partners in 2021.

We did not provide our major airline partners temporary rate reductions during the three months ended September 30, 2022.

The increase in “Capacity purchase agreements revenue:

aircraft lease and fixed revenue” of $35.0 million was primarily due to recognizing previously deferred revenue and unbilled revenue during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

aircraft lease and fixed revenue” of $9.7 million was primarily a result of the 33 E175 aircraft added to our fleet since September 30, 2021, offset by a decrease in deferred revenue and unbilled revenue recognized during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

Under our capacity purchase agreements, we are paid a fixed amount per month per aircraft over the contract term.

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Under our capacity purchase agreements, the performance obligation of each completed flight is measured in block hours incurred for each completed flight.

Based on the number of completed block hours during the three months ended June 30, 2022, we recognized $10.1 million of previously deferred revenue and $5.6 million of unbilled revenue on our capacity purchase agreements.

For the three months ended June 30, 2021, we deferred recognizing revenue on $5.6 million of fixed monthly cash payments we received under our capacity purchase agreements.

Based on the number of

completed block hours during the three months ended September 30, 2022, we recognized $8.2 million of previously deferred revenue and $5.1 million of unbilled revenue on our capacity purchase agreements.

For the three months ended September 30, 2021, we recognized $19.2 million of previously deferred revenue.

Our deferred revenue and unbilled revenue related to the fixed payments will adjust over the remaining contract term for each capacity purchase agreement based on the number of block hours we complete each reporting period relative to the number of block hours we anticipate completing over the remaining contract term of each capacity purchase agreement.

The deferred revenue balance applicable to each contract will be recorded as revenue by the end of each respective contract term.

Our total deferred revenue and unbilled revenue balances were $86.3 million and $17.7 million as of June 30, 2022, respectively.

Additionally, our aircraft lease and fixed rate revenue increased as a result of the 30 E175 aircraft added to our fleet since June 30, 2021.

The decrease in prorate agreements revenue of $8.5 million was primarily due to the decrease in prorate aircraft and passenger revenue we received on routes we operated under our prorate agreements during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

Due to labor constraints, including the number of available captains, we operated fewer aircraft under our prorate agreements during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

The increase in lease, airport services and other revenues of $1.3 million was primarily due to an increase in airport service revenue due to the increase in the number of flights operated at locations where we were contracted to provide airport customer service during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

Our total deferred revenue and unbilled revenue balances were $78.1 million and $22.8 million as of September 30, 2022, respectively.

The decrease in prorate agreements revenue of $33.6 million was primarily due to the decrease in prorate departures and passenger revenue we received on routes we operated under our prorate agreements during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

Due to labor constraints, including the number of available captains, we operated fewer aircraft under our prorate agreements during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

The increase in lease, airport services and other revenues of $0.2 million was primarily due to an increase in airport service revenue at locations where we were contracted to provide airport customer service during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

Operating Expenses

Individual expense components attributable to our operations are set forth in the following table (dollar amounts in thousands):

For the three months ended June 30,

For the three months ended September 30,

Salaries, wages and benefits

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Aircraft rentals

Special items - impairment charges

Payroll support grant

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Salaries, wages and benefits.

The $55.1 million, or 23.6%, increase in salaries, wages and benefits was due to increased costs to retain aviation professionals and increased direct labor costs resulting from the higher number of flights we operated during the three months ended June 30, 2022, compared to the three months ended June 30, 2021 .

The $42.1 million, or 15.9%, increase in salaries, wages and benefits was due to increased costs to attract and retain aviation professionals during the three months ended September 30, 2022, compared to the three months ended September 30, 2021 .

Aircraft maintenance, materials and repairs.

The $16.0 million, or 8.4%, decrease in aircraft maintenance expense was primarily due to reliability improvement costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets, including engine maintenance expense, throughout the 2021 year, including the three months ended June 30, 2021.

The $26.6 million, or 12.7%, decrease in aircraft maintenance expense was primarily due to reliability improvement costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets, including engine maintenance expense, throughout the 2021 year, including the three months ended September 30, 2021.

As a result of the maintenance work completed in 2021, our maintenance events were lower for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

Depreciation and amortization.

The $12.6 million, or 11.5%, decrease in depreciation and amortization expense was primarily due to certain CRJ200 aircraft that became fully depreciated since June 30, 2021.

This reduction in depreciation on our CRJ200 fleet was partially offset by an increase in depreciation expense due to the acquisition of 30 new E175 aircraft and spare engines since June 30, 2021.

The $12.2 million, or 11.1%, decrease in depreciation and amortization expense was primarily due to certain CRJ200 aircraft that became fully depreciated since September 30, 2021.

This reduction in depreciation on our CRJ200 fleet was partially offset by an increase in depreciation expense due to the acquisition of 33 new E175 aircraft and spare engines since September 30, 2021.

Aircraft fuel.

The $6.0 million, or 23.0%, increase in fuel cost was primarily due to an increase in our average fuel cost per gallon from $2.36 for the three months ended June 30, 2021, to $4.67 for the three months ended June 30, 2022, offset by a decrease in the number of flights we operated under our prorate arrangements and the corresponding decrease in gallons of fuel we purchased.

The $4.4 million, or 13.5%, decrease in fuel cost was primarily due to a decrease in the number of flights we operated under our prorate arrangements and the corresponding decrease in gallons of fuel we purchased, offset by an increase in our average fuel cost per gallon from $2.55 for the three months ended September 30, 2021, to $4.39 for the three months ended September 30, 2022.

We purchase and incur expense for all fuel on flights operated under our prorate agreements.

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The following table summarizes the gallons of fuel we purchased under our prorate agreements, for the periods indicated:

For the three months ended June 30,

For the three months ended September 30,

(in thousands)

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For clarity, our employee airport customer service labor costs are reflected in salaries, wages and benefits and the customer service labor costs we outsource to third parties are included in airport-related expenses.

The $4.5 million, or 20.6%, decrease in airport-related expenses for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, was primarily due to a decrease in subcontracted airport services and deicing events as a result of a decrease in the number of flights we operated under our prorate arrangements.

The $8.5 million, or 32.7%, decrease in airport-related expenses for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was primarily due to a decrease in subcontracted airport services and landing fees as a result of a decrease in the number of flights we operated under our prorate arrangements and a decrease in station rents as a result of exiting certain prorate markets.

Aircraft rentals.

The $0.3 million, or 1.9%, increase in aircraft rentals was primarily due to an increase in engines we leased since June 30, 2021.

Aircraft rentals primarily includes aircraft and engines we lease from third parties.

For the three months ended September 30, 2021, and the three months ended September 30, 2022, there were no significant changes to our leased aircraft and engines.

Special items - impairment charges.

Special items for the three months ended September 30, 2021, consisted of a non-cash impairment charge on certain SkyWest Airlines’ CRJ900 aircraft of $84.6 million.

We did not have a comparable non-cash impairment charge during the three months ended September 30, 2022.

Payroll support grant.

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Treasury and received $250.0 million in emergency relief through the American Rescue Plan Act payroll support program, of which $205.0 million was in the form of payroll support grants that were recognized as a reduction in labor expense over the periods the grants intended to compensate.

We recognized $114.1 million in payroll support grant proceeds we received as a reduction to our operating expenses for the three months ended June 30, 2021.

We did not have a comparable payroll support grant during the three months ended June 30, 2022.

We recognized $115.4 million in payroll support grant proceeds we received as a reduction to our operating expenses for the three months ended September 30, 2021.

We did not have a comparable payroll support grant during the three months ended September 30, 2022.

Other operating expenses.

Other operating expenses primarily consist of property taxes, hull and liability insurance, simulator costs, crew per diem, crew hotel costs and credit loss reserves.

The $26.2 million, or 44.9%, increase in other operating expenses was primarily related to an impairment charge of $15.2 million to write down assets held for sale at June 30, 2022, as well as an increase in other operating costs that correspond to the higher number of flights we operated during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, such as crew per diem, crew hotel costs and simulator costs.

The $5.1 million, or 7.4%, decrease in other operating expenses was primarily related to a reduction in other operating costs that correspond to the decrease in the number of flights we operated during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, such as crew per diem and crew hotel costs.

Interest Expense.

The $3.5 million, or 10.3%, decrease in interest expense was primarily related to an overall lower effective interest rate during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

The $4.3 million, or 14.8%, increase in interest expense was primarily related to the interest expense associated with 33 new E175 aircraft added to our fleet subsequent to September 30, 2021, which were debt financed.

Total airline expenses.

Our total airline expenses, comprised of our total operating expenses and interest expense, increased $165.0 million, or 28.7%, primarily due the payroll support program grant reflected as an offset to operating expenses for the three months ended June 30, 2021 and an increase in direct operating costs attributed to the higher number of completed flights during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

As our interest expense is primarily attributed to debt associated with financing aircraft under our capacity purchase agreements and as revenue earned under our capacity purchase agreements is intended to compensate us for our aircraft ownership costs, including interest expense, we believe our total airline expense is a meaningful expense measure for management discussion and analysis purposes.

Our total airline expenses, comprised of our total operating expenses and interest expense, increased $20.4 million, or 2.8%, primarily due to the payroll support program grant reflected as an offset to operating expenses, partially offset by a non-cash impairment charge for the three months ended September 30, 2021 and a decrease in direct operating costs attributed to the lower number of completed flights, offset by an increase in direct labor costs during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

aircraft ownership costs, including interest expense, we believe our total airline expense is a meaningful expense measure for management discussion and analysis purposes.

Summary of interest income, other income (expense) and provision for income taxes:

Interest income.

Interest income increased $2.3 million, or 1,118.6%, during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

The increase in interest income was primarily related to an increase in average interest rates attributed to our marketable securities subsequent to June 30, 2021.

Interest income increased $6.1 million, from $0.2 million for the three months ended September 30, 2021, to $6.3 million for the three months ended September 30, 2022.

The increase in interest income was primarily related to an increase in average interest rates attributed to our marketable securities subsequent to September 30, 2021.

Other income (expense), net.

Other income increased $11.9 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

Other income increased $12.2 million during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

The increase in other income was primarily a result of an increase in the fair market value of our equity investments and income related to our investment in a joint venture with a third party.

Provision for income taxes.

For the three months ended June 30, 2022 and 2021, our effective income tax rates were 25.8% and 23.8%, respectively, which include the statutory federal income tax rate of 21% and other reconciling income tax items, including state income taxes and the impact of non-deductible expenses.

Primarily due to the factors described above, we generated net income of $54.0 million, or $1.07 per diluted share, for the three months ended June 30, 2022, compared to net income of $62.0 million, or $1.22 per diluted share, for the three months ended June 30, 2021.

Six Months Ended June 30, 2022 and 2021

For the three months ended September 30, 2022 and 2021, our effective income tax rates were 14.8% and 31.9%, respectively, which include the statutory federal income tax rate of 21% and other reconciling income tax items, including state income taxes and the impact of non-deductible expenses.

The decrease in the effective tax rate primarily relates to a release of $7.4 million of a previously recorded uncertain tax position liability with the benefit partially offset by the recording of a valuation allowance on state net operating losses anticipated to expire prior to utilization that occurred during the three months ended September 30, 2022, compared the three months ended September 30, 2021.

Primarily due to the factors described above, we generated net income of $48.4 million, or $0.96 per diluted share, for the three months ended September 30, 2022, compared to net income of $9.7 million, or $0.19 per diluted share, for the three months ended September 30, 2021.

Nine Months Ended September 30, 2022 and 2021

Operational Statistics

The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below.

The increase in block hours, departures and passengers carried during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily due to additional aircraft operating under our capacity purchase agreements and the continued demand recovery from reduced flight schedules in 2021 resulting from the COVID-19 pandemic.

For the six months ended June 30,

The increase in departures and passengers carried during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to additional aircraft operating under our capacity purchase agreements and the continued demand recovery from reduced flight schedules in 2021 resulting from the COVID-19 pandemic, partially offset by labor constraints, including the number of available captains in 2022.

For the nine months ended September 30,

Block hours by aircraft type:

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The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands):

For the six months ended June 30,

For the nine months ended September 30,

Flying agreements

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We disaggregate our flying agreements revenue into the following categories (dollar amounts in thousands):

For the six months ended June 30,

For the nine months ended September 30,

Capacity purchase agreements revenue:

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The increase in “Capacity purchase agreements revenue:

flight operations” of $251.7 million was primarily due to an increase in the number of aircraft we operated under our contracts with our major airline partners during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

From June 30, 2021, to June 30, 2022, we added 53 aircraft under capacity purchase agreements.

Our completed departures increased 10.4% and completed block hours increased 7.6% during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Additionally, in response to the COVID-19 demand reduction experienced by our major airline partners in 2021, we provided temporary rate reductions to our major airline partners under our capacity purchase agreements during the

six months ended June 30, 2021.

We did not provide our major airline partners temporary rate reductions during the six months ended June 30, 2022.

flight operations” of $320.0 million was primarily due to an increase in the number of E175 aircraft we operated under our contracts with our major airline partners during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

From September 30, 2021, to September 30, 2022, we added 33 E175 aircraft under capacity purchase agreements.

Our completed departures increased 3.6%, our E175 aircraft completed block hours increased 7.7%, and total completed block hours were similar during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

We did not provide our major airline partners temporary rate reductions during the nine months ended September 30, 2022.

The increase in “Capacity purchase agreements revenue:

aircraft lease and fixed revenue” of $84.0 million was primarily due to recognizing previously deferred revenue and unbilled revenue during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

aircraft lease and fixed revenue” of $93.6 million was primarily due to recognizing previously deferred revenue and unbilled revenue during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

Under our capacity purchase agreements, we are paid a fixed amount per month per aircraft over the contract term.

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Under our capacity purchase agreements, the performance obligation of each completed flight is measured in block hours incurred for each completed flight.

Based on the number of completed block hours during the six months ended June 30, 2022, we recognized $17.6 million of previously deferred revenue and $9.3 million of unbilled revenue on our capacity purchase agreements.

For the six months ended June 30, 2021, we deferred recognizing revenue on $26.8 million of fixed monthly cash payments we received under our capacity purchase agreements.

Based on the number of completed block hours during the nine months ended September 30, 2022, we recognized $25.8 million of previously deferred revenue and $14.4 million of unbilled revenue on our capacity purchase agreements.

For the nine months ended September 30, 2021, we deferred recognizing revenue on $7.7 million of fixed monthly cash payments we received under our capacity purchase agreements.

The deferred revenue balance applicable to each contract will be recorded as revenue by the end of each respective contract term.

Our total deferred revenue and unbilled revenue balances were $86.3 million and $17.7 million as of June 30, 2022, respectively.

Additionally, our aircraft lease and fixed rate revenue increased as a result of the 30 E175 aircraft added to our fleet since June 30, 2021.

The increase in prorate agreements revenue of $2.0 million was primarily due to the increase in prorate passengers and passenger revenue we received on routes we operated under our prorate agreements, offset by a decrease in the number of aircraft we operated under our prorate agreements during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Due to the ongoing COVID-19 demand recovery, our prorate passenger load factors increased during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, despite operating fewer prorate flights for the six months ended June 30, 2022.

The increase in lease, airport services and other revenues of $5.0 million was primarily due to an increase in airport service revenue due to the increase in the number of flights operated at locations where we were contracted to provide airport customer service during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Our total deferred revenue and unbilled revenue balances were $78.1 million and $22.8 million, respectively, as of September 30, 2022.

Additionally, our aircraft lease and fixed rate revenue increased as a result of the 33 E175 aircraft added to our fleet since September 30, 2021.

The decrease in prorate agreements revenue of $31.5 million was primarily due to the decrease in prorate passengers and passenger revenue we received on routes we operated under our prorate agreements.

Due to labor constraints, including the number of available captains, we operated fewer aircraft under our prorate agreements during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

The increase in lease, airport services and other revenues of $5.2 million was primarily due to an increase in airport service revenue due to the increase in the number of flights operated at locations where we were contracted to provide airport customer service during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

Operating Expenses

Individual expense components attributable to our operations are set forth in the following table (dollar amounts in thousands):

For the six months ended June 30,

For the nine months ended September 30,

Salaries, wages and benefits

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Aircraft rentals

Special items - impairment charges

Payroll support grant

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Salaries, wages and benefits.

The $135.4 million, or 29.9%, increase in salaries, wages and benefits was due to increased costs to retain aviation professionals and increased direct labor costs resulting from the higher number of flights we operated during the six months ended June 30, 2022, compared to the six months ended June 30, 2021 .

The $177.5 million, or 24.7%, increase in salaries, wages and benefits was due to increased costs to attract and retain aviation professionals and increased direct labor costs resulting from the higher number of flights we operated during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021 .

Aircraft maintenance, materials and repairs.

The $71.4 million, or 18.1%, decrease in aircraft maintenance expense was primarily due to reliability improvement costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets, such as engine maintenance expense, throughout the 2021 year, including the six months ended June 30, 2021.

The $98.0 million, or 16.2%, decrease in aircraft maintenance expense was primarily due to reliability improvement costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets, such as engine maintenance expense, throughout the 2021 year, including the nine months ended September 30, 2021.

As a result of the maintenance work completed in 2021, our maintenance events were lower for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

Depreciation and amortization.

The $19.5 million, or 8.9%, decrease in depreciation and amortization expense was primarily due to certain CRJ200 aircraft that became fully depreciated since June 30, 2021.

This reduction in depreciation on our CRJ200 fleet was partially offset by an increase in depreciation expense due to the acquisition of 30 new E175 aircraft and spare engines since June 30, 2021.

The $31.7 million, or 9.6%, decrease in depreciation and amortization expense was primarily due to certain CRJ200 aircraft that became fully depreciated since September 30, 2021.

Aircraft fuel.

The $11.8 million, or 26.3%, increase in fuel cost was primarily due to an increase in our average fuel cost per gallon from $2.25 for the six months ended June 30, 2021, to $4.01 for the six months ended June 30, 2022, offset by a decrease in the number of flights we operated under our prorate arrangements and the corresponding decrease in gallons of fuel we purchased.

The $7.5 million, or 9.6%, increase in fuel cost was primarily due to an increase in our average fuel cost per gallon from $2.37 for the nine months ended September 30, 2021, to $4.13 for the nine months ended September 30, 2022, offset by a decrease in the number of flights we operated under our prorate arrangements and the corresponding decrease in gallons of fuel we purchased.

We purchase and incur expense for all fuel on flights operated under our prorate agreements.

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The following table summarizes the gallons of fuel we purchased under our prorate agreements, for the periods indicated:

For the six months ended June 30,

For the nine months ended September 30,

(in thousands)

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Airport-related expenses include airport-related customer service costs such as outsourced airport gate and ramp agent services, airport security fees, passenger interruption costs, deicing, landing fees and station rents.

The $9.8 million, or 21.1%, decrease in airport-related expenses for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily due to a decrease in subcontracted airport services and deicing events as a result of a decrease in the number of flights we operated under our prorate arrangements.

The $18.3 million, or 25.2%, decrease in airport-related expenses for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to a decrease in subcontracted airport services, landing fees, and deicing events as a result of a decrease in the number of flights we operated under our prorate arrangements and a decrease in station rents as a result of exiting certain prorate markets.

Aircraft rentals.

The $0.8 million, or 2.6%, increase in aircraft rentals was primarily due to an increase in engines we leased since June 30, 2021.

The $0.8 million, or 1.7%, increase in aircraft rentals was primarily due to an increase in aircraft and engines we leased during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

Special items - impairment charges.

Special items for the nine months ended September 30, 2021, consisted of a non-cash impairment charge on certain SkyWest Airlines’ CRJ900 aircraft of $84.6 million.

We did not have a comparable non-cash impairment charge during the nine months ended September 30, 2022.

Payroll support grant.

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Treasury and received $233.1 million in emergency relief through the 2021 Appropriations Act payroll support program, of which $193.2 million was in the form of payroll support grants that were recognized as a reduction in labor expense over the periods the grants intended to compensate.

In April 2021, we entered into an agreement with U.S.

Additionally, in April 2021, the Company received an additional $35.0 million in proceeds under the PSP Extension Agreement, of which $24.5 million was in the form of payroll support grants that were recognized as a reduction of labor expense during the period the grant was intended to compensate.

In April 2021, we also entered into an agreement with U.S.

We recognized $307.3 million in payroll support grant proceeds we received as a reduction to our operating expenses for the six months ended June 30, 2021.

We did not have a comparable payroll support grant during the six months ended June 30, 2022.

We recognized $422.7 million in payroll support grant proceeds we received as a reduction to our operating expenses for the nine months ended September 30, 2021.

We did not have a comparable payroll support grant during the nine months ended September 30, 2022.

Other operating expenses.

Other operating expenses primarily consist of property taxes, hull and liability insurance, simulator costs, crew per diem, crew hotel costs and credit loss reserves.

The $43.3 million, or 38.4%, was primarily related to an increase in other operating costs that correspond to the higher number of flights we operated during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, such as crew per diem, crew hotel costs and simulator costs, as well as an impairment charge of $15.2 million to write down assets held for sale at June 30, 2022.

The $38.2 million, or 21.0%, increase was primarily related to an increase in other operating costs that correspond to the higher number of flights we operated during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, such as crew per diem, crew hotel costs and simulator costs, as well as an asset held for sale write-down of $15.2 million during the nine months ended September 30, 2022.

Interest Expense.

The $6.3 million, or 9.6%, decrease in interest expense was primarily related to an overall lower effective interest rate during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

The $2.0 million, or 2.1%, decrease in interest expense was primarily related to an overall lower effective interest rate during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, offset by an increase in long-term debt since September 30, 2021.

Total airline expenses.

Our total airline expenses, comprised of our total operating expenses and interest expense, increased $391.6 million, or 36.9%, during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due the payroll support program grant reflected as an offset to operating expenses for the

six months ended June 30, 2021 and an increase in direct operating costs attributed to the higher number of completed flights.

Our total airline expenses, comprised of our total operating expenses and interest expense, increased $412.1 million, or 23.1%, during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due the payroll support program grant reflected as an offset to operating expenses for the nine months ended September 30, 2021, and an increase in direct operating costs attributed to the higher number of completed flights.

Summary of interest income, other income (expense) and provision for income taxes:

Interest income.

Interest income increased $2.5 million, or 504.0%, during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

The increase in interest income was primarily related to an increase in average interest rates attributed to our marketable securities subsequent to June 30, 2021.

Interest income increased $8.6 million, from $0.7 million for the nine months ended September 30, 2021, to $9.3 million for the nine months ended September 30, 2022.

The increase in interest income was primarily related to an increase in average interest rates attributed to our marketable securities subsequent to September 30, 2021.

Other income (expense), net.

Other income increased $12.6 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

Other income increased $24.8 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

The increase in other income was primarily a result of an increase in the fair market value of our equity investments and income related to our investment in a joint venture with a third party.

Provision for income taxes.

For the six months ended June 30, 2022 and 2021, our effective income tax rates were 26.5% and 25.5%, respectively, which include the statutory federal income tax rate of 21% and other reconciling income tax items, including state income taxes, the impact of non-deductible expenses and the discrete tax expense or benefit on employee equity transactions.

The increase in the effective tax rate primarily relates to a discrete tax expense for employee equity transactions that occurred during the six months ended June 30, 2022, compared the six months ended June 30, 2021.

Primarily due to the factors described above, we generated net income of $71.7 million, or $1.42 per diluted share, for the six months ended June 30, 2022, compared to net income of $97.9 million, or $1.93 per diluted share, for the six months ended June 30, 2021.

For the nine months ended September 30, 2022 and 2021, our effective income tax rates were 22.2% and 26.1%, respectively, which include the statutory federal income tax rate of 21% and other reconciling income tax items, including state income taxes, the impact of non-deductible expenses and the discrete tax expense or benefit on employee equity transactions.

The decrease in the effective tax rate primarily relates to a release of $7.4 million of a previously recorded uncertain tax position liability with the benefit partially offset by the recording of a valuation allowance on state net operating losses anticipated to expire prior to utilization that occurred during the nine months ended September 30, 2022, compared the nine months ended September 30, 2021.

Primarily due to the factors described above, we generated net income of $120.1 million, or $2.37 per diluted share, for the nine months ended September 30, 2022, compared to net income of $107.6 million, or $2.12 per diluted share, for the nine months ended September 30, 2021.

Our Business Segments

Three Months Ended June 30, 2022 and 2021

For the three months ended June 30, 2022, we had two reportable segments, which were the basis of our internal financial reporting:

Three Months Ended September 30, 2022 and 2021

For the three months ended September 30, 2022, we had two reportable segments, which were the basis of our internal financial reporting:

SkyWest Airlines and SkyWest Leasing.

Our segment disclosure relates to components of our business for which separate financial information is available to, and regularly evaluated by, our chief operating decision maker.

For the three months ended June 30,

For the three months ended September 30,

(dollar amounts in thousands)

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Total Airline Expenses (1)

Segment profit:

SkyWest Airlines segment profit

Segment profit (loss):

SkyWest Airlines segment loss

SkyWest Leasing profit

1 unchanged sentence

Interest Income

Other Income, net

Other Income (Expense), net

Consolidated Income Before Taxes

(1) Total Airline Expenses includes operating expense and interest expense.

SkyWest Airlines Segment Profit.

SkyWest Airlines segment profit decreased $18.9 million for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

SkyWest Airlines block hour production increased to 334,753, or 3.3%, for the three months ended June 30, 2022, from 324,045 for the three months ended June 30, 2021, primarily due to additional aircraft operating under our capacity purchase agreements and demand recovery from reduced flight schedules in response to the COVID-19 pandemic.

Significant items contributing to the SkyWest Airlines segment profit are set forth below.

SkyWest Airlines operating revenues increased $136.6 million, or 25.9%, from the three months ended June 30, 2021, to the three months ended June 30, 2022, due to additional aircraft operating under our capacity purchase agreements, increased flight schedules, and more flights we handled under our airport service agreements, collectively as a result of the demand recovery from the COVID-19 pandemic.

SkyWest Airlines also provided COVID-19 related temporary rate reductions to our major airline partners under our capacity purchase agreements during the three months ended June 30, 2021.

Additionally, during the three months ended June 30, 2022, SkyWest Airlines recognized $10.1 million of previously deferred revenue and $5.6 million of unbilled revenue on our capacity purchase agreements, compared to deferring revenue of $5.6 million during the three months ended June 30, 2021.

SkyWest Airlines airline expense increased $155.5 million, or 32.2%, from the three months ended June 30, 2021, to the three months ended June 30, 2022, due to the following primary factors:

● SkyWest Airlines’ salaries, wages and benefits expense increased by $55.1 million, or 23.7%, primarily due to increased costs to retain aviation professionals and increased direct labor costs resulting from the higher number of flights we operated during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

● SkyWest Airlines’ aircraft maintenance, materials and repairs expense decreased by $14.1 million, or 7.6%, primarily due to reliability improvement costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets throughout the 2021 year, such as engine maintenance expense, including the three months ended June 30, 2021.

● SkyWest Airlines’ depreciation and amortization expense decreased by $8.2 million, or 15.4%, primarily due to certain CRJ200 aircraft that became fully depreciated since June 30, 2021, partially offset by an increase in depreciation expense related to the acquisition of used CRJ700 aircraft since June 30, 2021.

● SkyWest Airlines’ fuel expense increased $6.0 million, or 23.0%, due to an increase in our average fuel cost per gallon from $2.36 for the three months ended June 30, 2021, to $4.67 for the three months ended June 30, 2022 , offset by a decrease in the number of flights we operated under our prorate arrangements and the corresponding decrease in gallons of fuel we purchased.

● SkyWest Airlines recognized $114.1 million in payroll support grant proceeds as a reduction to our operating expenses for the three months ended June 30, 2021.

SkyWest Airlines did not have a comparable grant for the three months ended June 30, 2022.

● SkyWest Airlines’ remaining airline expenses increased $2.5 million, or 2.5%, primarily related to an increase in other operating costs that correspond to the higher number of flights we operated for the three months ended June 30, 2022, compared to the three months ended June 30, 2021 , such as crew per diem, crew hotel costs and simulator costs.

SkyWest Airlines Segment Loss.

SkyWest Airlines segment loss decreased $18.9 million for the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

SkyWest Airlines block hour production decreased to 323,742, or 12.6%, for the three months ended September 30, 2022, from 370,462 for the three months ended September 30, 2021, primarily due to reduced flight schedules as a result of labor constraints, including the number of available captains.

Significant items contributing to the SkyWest Airlines segment loss are set forth below.

SkyWest Airlines operating revenues increased $37.1 million, or 6.0%, from the three months ended September 30, 2021, to the three months ended September 30, 2022, primarily due to temporary rate reductions SkyWest Airlines provided to our major airline partners under our capacity purchase agreements during the three months ended September 30, 2021 in response to the COVID-19 demand reduction experienced by our major airline partners in 2021.

SkyWest Airlines did not provide similar rate reductions to our major airline partners in 2022.

The increase in revenue was partially offset by a decrease in prorate revenue during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

SkyWest Airlines airline expense increased $18.2 million, or 2.9%, from the three months ended September 30, 2021, to the three months ended September 30, 2022, due to the following primary factors:

● SkyWest Airlines’ salaries, wages and benefits expense increased by $42.0 million, or 15.9%, primarily due to increased costs to attract and retain aviation professionals during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

● SkyWest Airlines’ aircraft maintenance, materials and repairs expense decreased by $26.0 million, or 12.7%, primarily due to reliability improvement costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets throughout the 2021 year, such as engine maintenance expense, included in the three months ended September 30, 2021.

● SkyWest Airlines’ depreciation and amortization expense decreased by $9.6 million, or 18.0%, primarily due to certain CRJ200 aircraft that became fully depreciated since September 30, 2021, partially offset by an increase in depreciation expense related to the acquisition of used CRJ700 aircraft since September 30, 2021.

● SkyWest Airlines’ fuel expense decreased $4.4 million, or 13.5%, due to a decrease in the number of flights we operated under our prorate arrangements and the corresponding decrease in gallons of fuel we purchased, offset by an increase in our average fuel cost per gallon from $2.55 for the three months ended September 30, 2021, to $4.39 for the three months ended September 30, 2022 .

● SkyWest Airlines recorded a non-cash impairment charge on its CRJ900 aircraft of $84.6 million for the three months ended September 30, 2021.

SkyWest Airlines did not have a comparable non-cash impairment charge for the three months ended September 30, 2022.

● SkyWest Airlines recognized $115.4 million in payroll support grant proceeds as a reduction to our operating expenses for the three months ended September 30, 2021.

SkyWest Airlines did not have a comparable grant for the three months ended September 30, 2022.

● SkyWest Airlines’ remaining airline expenses decreased $14.6 million, or 13.1%, primarily related to a decrease in other operating costs that correspond to the lower number of flights we operated for the three months ended September 30, 2022, compared to the three months ended September 30, 2021 , such as crew per diem and crew hotel costs.

SkyWest Leasing Segment Profit.

SkyWest Leasing profit decreased $4.0 million, or 10.9%, during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to the $15.2 million impairment charge related to the write down of assets held for sale, offset by the acquisition of 30 new E175 aircraft added to our fleet subsequent to June 30, 2021.

Six Months Ended June 30, 2022 and 2021

For the six months ended June 30, 2022, we had two reportable segments, which were the basis of our internal financial reporting:

SkyWest Leasing profit increased $5.3 million, or 13.7%, during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to the acquisition of 33 new E175 aircraft added to our fleet subsequent to September 30, 2021.

Nine Months Ended September 30, 2022 and 2021

For the nine months ended September 30, 2022, we had two reportable segments, which were the basis of our internal financial reporting:

SkyWest Airlines and SkyWest Leasing.

Our segment disclosure relates to components of our

business for which separate financial information is available to, and regularly evaluated by, our chief operating decision maker.

For the six months ended June 30,

Our segment disclosure relates to components of our business for which separate financial information is available to, and regularly evaluated by, our chief operating decision maker.

For the nine months ended September 30,

(dollar amounts in thousands)

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Interest Income

Other Income, net

Other Income (Expense), net

Consolidated Income Before Taxes

1 unchanged sentence

SkyWest Airlines Segment Profit.

SkyWest Airlines segment profit decreased $54.1 million for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

SkyWest Airlines block hour production increased to 645,746, or 7.6%, for the six months ended June 30, 2022, from 600,227 for the six months ended June 30, 2021, primarily due to additional aircraft operating under our capacity purchase agreements and demand recovery from reduced flight schedules in response to the COVID-19 pandemic.

Significant items contributing to the SkyWest Airlines segment profit (loss) are set forth below.

SkyWest Airlines operating revenues increased $333.2 million, or 35.7%, from the six months ended June 30, 2021, to the six months ended June 30, 2022, due to additional aircraft operating under our capacity purchase agreements, increased flight schedules, and more flights we handled under our airport service agreements, collectively as a result of the demand recovery from the COVID-19 pandemic.

SkyWest Airlines also provided COVID-19 related temporary rate reductions to our major airline partners under our capacity purchase agreements during the six months ended June 30, 2021.

Additionally, during the six months ended June 30, 2022, SkyWest Airlines recognized $17.6 million of previously deferred revenue and $9.3 million of unbilled revenue on our capacity purchase agreements, compared to deferring revenue of $26.8 million during the six months ended June 30, 2021.

SkyWest Airlines airline expense increased $387.3 million, or 44.3%, from the six months ended June 30, 2021, to the six months ended June 30, 2022, due to the following primary factors:

● SkyWest Airlines’ salaries, wages and benefits expense increased by $135.4 million, or 30.0%, primarily due to increased costs to retain aviation professionals and increased direct labor costs resulting from the higher number of flights we operated during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.

● SkyWest Airlines’ aircraft maintenance, materials and repairs expense decreased by $69.4 million, or 18.1%, primarily due to reliability improvement costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets throughout the 2021 year, such as engine maintenance expense, including the six months ended June 30, 2021.

● SkyWest Airlines’ depreciation and amortization expense decreased by $10.8 million, or 10.4%, primarily due to certain CRJ200 aircraft that became fully depreciated since June 30, 2021, partially offset by an increase in depreciation expense related to the acquisition of used CRJ700 aircraft since June 30, 2021.

● SkyWest Airlines’ fuel expense increased $11.8 million, or 26.3%, due to an increase in our average fuel cost per gallon from $2.25 for the six months ended June 30, 2021, to $4.01 for the six months ended June 30, 2022 , offset by a decrease in the number of flights we operated under our prorate arrangements and the corresponding decrease in gallons of fuel we purchased.

● SkyWest Airlines recognized $307.3 million in payroll support grant proceeds as a reduction to our operating expenses for the six months ended June 30, 2021.

SkyWest Airlines did not have a comparable grant for the six months ended June 30, 2022.

● SkyWest Airlines’ remaining airline expenses increased $13.0 million, or 6.6%, primarily related to an increase in other operating costs that correspond to the higher number of flights we operated for the six months ended June 30, 2022, compared to the six months ended June 30, 2021 , such as crew per diem, crew hotel costs and simulator costs.

SkyWest Airlines segment profit decreased $35.2 million for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

SkyWest Airlines block hour production decreased slightly to 969,488, or 0.1%, for the nine months ended September 30, 2022, from 970,689 for the nine months ended September 30, 2021, primarily due to labor constraints, including the number of available captains.

Significant items contributing to the SkyWest Airlines segment profit are set forth below.

SkyWest Airlines operating revenues increased $370.3 million, or 23.9%, from the nine months ended September 30, 2021, to the nine months ended September 30, 2022, due to additional aircraft operating under our capacity purchase agreements, as well as temporary rate reductions SkyWest Airlines provided to our major airline partners under our capacity purchase agreements during the nine months ended September 30, 2021, in response to the COVID-19 demand reduction experienced by our major airline partners in 2021.

Additionally, during the nine months ended September 30, 2022, SkyWest Airlines recognized $25.8 million of previously deferred revenue and $14.4 million of unbilled revenue on our capacity purchase agreements, compared to deferring revenue of $7.7 million during the nine months ended September 30, 2021.

SkyWest Airlines airline expense increased $405.5 million, or 26.9%, from the nine months ended September 30, 2021, to the nine months ended September 30, 2022, due to the following primary factors:

● SkyWest Airlines’ salaries, wages and benefits expense increased by $177.4 million, or 24.7%, primarily due to increased costs to attract and retain aviation professionals and increased direct labor costs resulting from the higher number of flights we operated during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

● SkyWest Airlines’ aircraft maintenance, materials and repairs expense decreased by $95.4 million, or 16.2%, primarily due to reliability improvement costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets throughout the 2021 year, such as engine maintenance expense, included in the nine months ended September 30, 2021.

● SkyWest Airlines’ depreciation and amortization expense decreased by $20.4 million, or 13.0%, primarily due to certain CRJ200 aircraft that became fully depreciated since September 30, 2021, partially offset by an increase in depreciation expense related to the acquisition of used CRJ700 aircraft since September 30, 2021.

● SkyWest Airlines’ fuel expense increased $7.5 million, or 9.6%, due to an increase in our average fuel cost per gallon from $2.37 for the nine months ended September 30, 2021, to $4.13 for the nine months ended September 30, 2022 , offset by a decrease in the number of flights we operated under our prorate arrangements and the corresponding decrease in gallons of fuel we purchased.

● SkyWest Airlines recorded a non-cash impairment charge on its CRJ900 aircraft of $84.6 million for the nine months ended September 30, 2021.

SkyWest Airlines did not have a comparable non-cash impairment charge for the nine months ended September 30, 2022.

● SkyWest Airlines recognized $422.7 million in payroll support grant proceeds as a reduction to our operating expenses for the nine months ended September 30, 2021.

SkyWest Airlines did not have a comparable grant for the nine months ended September 30, 2022.

● SkyWest Airlines’ remaining airline expenses decreased $1.7 million, or 0.5%, primarily related to a decrease in other operating costs that correspond to a decrease in our prorate operations for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021 , such as subcontracted airport services, landing fees, and deicing events.

SkyWest Leasing Segment Profit.

SkyWest Leasing profit increased $5.2 million, or 7.3%, during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to the acquisition of 30 new E175 aircraft added to our fleet subsequent to June 30, 2021, offset by the $15.2 million impairment charge related to the write down of assets held for sale.

SkyWest Leasing profit increased $10.5 million, or 9.5%, during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to the acquisition of 33 new E175 aircraft added to our fleet subsequent to September 30, 2021, offset by the $15.2 million impairment charge related to the write down of assets held for sale.

Liquidity and Capital Resources

As of June 30, 2022, we had $974.7 million in cash and cash equivalents and marketable securities.

As of June 30, 2022, we had $68.6 million available for borrowings under our line of credit.

Given our available liquidity as of June 30, 2022, and given the measures we have implemented to reduce the impact of the COVID-19 pandemic on our financial position and operations, we believe the working capital currently available to us will be sufficient to meet our present financial requirements, including planned capital expenditures, scheduled lease payments, and debt service obligations for at least the next 12 months.

Our total cash and marketable securities increased from $860.4 million as of December 31, 2021, to $974.7 million as of June 30, 2022, or by $114.3 million.

At June 30, 2022, our total capital mix was 45.0% equity and 55.0% long-term debt, compared to 45.5% equity and 54.5% long-term debt at December 31, 2021.

As of June 30, 2022, and December 31, 2021, we had $61.4 million in letters of credit and surety bonds outstanding with various banks and surety institutions.

We had no restricted cash as of June 30, 2022, and December 31, 2021.

As of September 30, 2022, we had $1.0 billion in cash and cash equivalents and marketable securities.

As of September 30, 2022, we had $68.6 million available for borrowings under our line of credit.

Given our available liquidity as of September 30, 2022, and given the measures we have implemented to reduce the impact of the COVID-19 pandemic on our financial position and operations, we believe the working capital currently available to us will be sufficient to meet our present financial requirements, including planned capital expenditures, scheduled lease payments, and debt service obligations for at least the next 12 months.

Our total cash and marketable securities increased from $860.4 million as of December 31, 2021, to $1.0 billion as of September 30, 2022, or by $143.8 million.

At September 30, 2022, our total capital mix was 44.6% equity and 55.4% long-term debt, compared to 45.5% equity and 54.5% long-term debt at December 31, 2021.

As of September 30, 2022, and December 31, 2021, we had $61.4 million in letters of credit and surety bonds outstanding with various banks and surety institutions.

We had no restricted cash as of September 30, 2022, and December 31, 2021.

Sources and Uses of Cash

Cash Position and Liquidity.

The following table provides a summary of the net cash provided by (used in) our operating, investing and financing activities for the six months ended June 30, 2022 and 2021, and our total cash and marketable securities positions as of June 30, 2022, and December 31, 2021 (in thousands):

For the six months ended June 30,

The following table provides a summary of the net cash provided by (used in) our operating, investing and financing activities for the nine months ended September 30, 2022 and 2021, and our total cash and marketable securities positions as of September 30, 2022, and December 31, 2021 (in thousands):

For the nine months ended September 30,

Net cash provided by operating activities

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Net cash provided by (used in) financing activities

September 30,

Cash and cash equivalents

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Cash Flows provided by Operating Activities

Our cash flows provided by operating activities was $215.3 million for the six months ended June 30, 2022, compared to $498.7 million for the six months ended June 30, 2021.

Our cash flows provided by operating activities was $343.5 million for the nine months ended September 30, 2022, compared to $687.0 million for the nine months ended September 30, 2021.

Our operating cash flows are typically impacted by various factors including our net income, adjusted for non-cash expenses and gains such as depreciation expense, stock-based compensation expense, and gains or losses on the disposal of assets;

and timing of cash payments and cash receipts attributed to our various current asset and liability accounts, such as accounts receivable, inventory, accounts payable, accrued liabilities, deferred revenue and deferred payroll support grant proceeds.

The decrease in our cash flow from operations for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily due to the timing of cash payments on our current liability accounts and changes in our deferred and unbilled revenue accounts for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, combined with a decrease in net income from $97.9 million for the six months ended June 30, 2021, to $71.7 million for the six months ended June 30, 2022.

The decrease in our cash flow from operations for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to an impairment charge of $84.6 million reflected as a non-cash reconciling addition to income for the nine months ended September 30, 2021 and the timing of cash payments on our current liability accounts and changes in our deferred revenue and unbilled revenue accounts for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

Cash Flows used in Investing Activities

Our cash flows used in investing activities was $556.6 million for the six months ended June 30, 2022, compared to cash flows used in investing activities of $182.4 million for the six months ended June 30, 2021.

Our cash flows used in investing activities was $864.6 million for the nine months ended September 30, 2022, compared to cash flows used in investing activities of $396.8 million for the nine months ended September 30, 2021.

Our investing cash flows are typically impacted by various factors including our capital expenditures, such as the acquisition of aircraft and spare engines;

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and timing of cash payments and cash receipts attributed to our various long-term asset and long-term liability accounts.

Cash used for the acquisition of property and equipment, net of aircraft deposits applied towards acquired aircraft, increased by $167.0 million from $63.5 million for the six months ended June 30, 2021, to $230.5 million for the six months ended June 30, 2022, primarily due to the purchase of twelve new E175 aircraft during the six months ended June 30, 2022, compared to the purchase of six used CRJ700 aircraft during the six months ended June 30, 2021.

Cash used for purchases of marketable securities, net of sales of marketable securities, increased from $0.4 million for the six months ended June 30, 2021, to $278.6 million for the six months ended June 30, 2022.

Additionally, the reduction in the cash used in other long-term assets for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, resulted from the timing of payments received from our major airline partners attributed to our long-term receivables.

Cash used for the acquisition of property and equipment, net of aircraft deposits applied towards acquired aircraft, increased by $195.9 million from $223.1 million for the nine months ended September 30, 2021, to $419.0 million for the nine months ended September 30, 2022, primarily due to the purchase of 21 new E175 aircraft during the nine months ended September 30, 2022, compared to the purchase of six new E175 aircraft and 10 used CRJ700 aircraft during the nine months ended September 30, 2021.

Cash used for purchases of marketable securities, net of sales of marketable securities, increased by $337.4 million from $30.5 million for the nine months ended September 30, 2021, to $367.9 million for the nine months ended September 30, 2022, resulting from the transfer of cash into marketable securities accounts.

Additionally, we reduced cash used on new aircraft deposits to $37.1 million for the nine months ended September 30, 2022, from $100.1 million for the nine months ended September 30, 2021, based on the timing of new aircraft orders.

Cash Flows provided by (used in) Financing Activities

Our cash flows provided by financing activities was $179.0 million for the six months ended June 30, 2022, compared to cash used in financing activities of $186.2 million for the six months ended June 30, 2021.

Our cash flows provided by financing activities was $301.5 million for the nine months ended September 30, 2022, compared to cash used in financing activities of $234.1 million for the nine months ended September 30, 2021.

Our financing cash flows are typically impacted by various factors including proceeds from issuance of debt, principal payments on debt obligations, repurchases of our common stock and payment of cash dividends.

The $365.1 million increase in cash provided by financing activities for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily due to an increase of $281.3 million in proceeds from the issuance of long-term debt primarily related to the acquisition of twelve E175 aircraft and $127.9 million in debt secured by engines during the six months ended June 30, 2022.

Additionally, cash used for principal payments on long-term debt decreased $84.8 million from the six months ended June 30, 2021, to the six months ended June 30, 2022, primarily due to paying off a portion of our long-term debt during the six months ended June 30, 2021.

The $535.5 million increase in cash provided by financing activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to an increase of $388.1 million in proceeds from the issuance of long-term debt primarily related to the acquisition of 21 E175 aircraft and an increase in debt secured by engines during the nine months ended September 30, 2022.

Additionally, cash used for principal payments on long-term debt decreased $148.7 million from the nine months ended September 30, 2021, to the nine months ended September 30, 2022, primarily due to paying off a portion of our long-term debt during the nine months ended September 30, 2021.

Significant Commitments and Obligations

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Purchase Commitments and Options

As of June 30, 2022, we had a firm purchase commitment for 17 new E175 aircraft from Embraer with delivery dates anticipated into the first half of 2023.

As of September 30, 2022, we had a firm purchase commitment for eight new E175 aircraft from Embraer with delivery dates anticipated into 2025.

At the time of each aircraft acquisition, we evaluate the financing alternatives available to us, and select one or more of these methods to fund the acquisition.

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Based on current market conditions and discussions with prospective leasing organizations and financial institutions, we currently believe that we will be able to obtain financing for our committed acquisitions, as well as additional aircraft.

We intend to finance the firm purchase commitment for 17 E175 aircraft with approximately 80-85% debt and the remaining balance with cash.

We intend to finance the firm purchase commitment for eight E175 aircraft with approximately 80-85% debt and the remaining balance with cash.

Aircraft Lease and Facility Obligations

We also have significant long-term lease obligations, primarily relating to our aircraft fleet.

Excluding aircraft financed by our major airline partners that we operate for them under contract, we had 43 aircraft under lease with remaining terms ranging from two years to eight years as of June 30, 2022.

Future minimum lease payments due under all long-term operating leases were approximately $260.8 million at June 30, 2022.

Assuming a 6.0% discount rate, which is the average incremental borrowing rate we anticipate we would have incurred on debt obtained over a similar term to acquire these assets, the present value of these lease obligations would have been equal to approximately $210.2 million at June 30, 2022.

Future minimum lease payments due under all long-term operating leases were approximately $238.0 million at September 30, 2022.

Long-term Debt Obligations

As of June 30, 2022, we had $3.0 billion of long-term debt obligations related to the acquisition of aircraft.

The average effective interest rate on those long-term debt obligations was approximately 3.9% at June 30, 2022.

We also had $200.6 million of long-term debt obligations under the Payroll Support Program Agreement, PSP Extension Agreement, and Payroll Support Program 3 Agreement with U.S.

As of September 30, 2022, we had $3.1 billion of long-term debt obligations related to the acquisition of aircraft.

The average effective interest rate on those long-term debt obligations was approximately 4.0% at September 30, 2022.

We also had $200.6 million of long-term debt obligations under the PSP1, PSP2 and PSP3 programs with U.S.

Treasury and $160.5 million of long-term debt secured by spare engines.

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Our results of operations for any interim period are not necessarily indicative of those for an entire year, since the airline industry is subject to seasonal fluctuations and general economic conditions.

Our operations are somewhat favorably affected by increased travel on our prorate routes, historically occurring during the summer months, and

unfavorably affected by decreased travel during the months of November through February and by inclement weather, which may occasionally or frequently, depending on the severity of the inclement weather in any given winter, result in cancelled flights during the winter months.

Our operations are somewhat favorably affected by increased travel on our prorate routes, historically occurring during the summer months, and unfavorably affected by decreased travel during the months of November through February and by inclement weather, which may occasionally or frequently, depending on the severity of the inclement weather in any given winter, result in cancelled flights during the winter months.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis